Tribune execs to share 8% cut

Tribune Company was founded in 1847. That year, on June 10, the Chicago Tribune published its first edition in a one-room plant located at LaSalle and Lake Streets. The original press run consisted of 400 copies printed on a hand press. In 1983, after 136 years of private ownership, Tribune became a public company with an initial offering of 7.7 million shares valued at $206 million. The opening price per share was $26.75. The company's New York Stock Exchange ticker symbol was TRB. In December of 2007, Tribune returned to private ownership through a leveraged transaction led by Sam Zell. In late 2008, following a severe downturn in the economy and a prolonged advertising slump, Tribune filed for protection under Chapter 11 of the U.S. Bankruptcy Code.

Julie Johnsson and Michael OnealTribune staff reporters

Tribune Co. executives stand to gain a windfall equal to 8 percent of themedia giant's value after it goes private in an $8.2 billion transaction laterthis year, according to merger documents filed Thursday with the Securitiesand Exchange Commission.

The management incentives could be worth hundreds of millions of dollars ifbillionaire Sam Zell, who is orchestrating the buyout, and company leaderssuccessfully pay down the more than $13 billion in debt that Tribune willcarry following the deal, which comes at a time when advertising andcirculation revenues are under pressure.

In a marathon bargaining session Sunday, company directors approved the newincentive plan that will be distributed after the deal closes.

They also approved $6.5 million in cash bonuses to be paid out to 38executives and employees who are "playing a critical role in overseeing thecompletion" of the leveraged employee stock ownership plan (ESOP) buyout, thefiling said.

The identities of the executives and employees covered under the plan werenot known.

Dennis FitzSimons, the company's chairman, president and CEO, elected notto accept a bonus, merger documents show. However, Donald Grenesko, thecompany's senior vice president for finance and administration, will be paid a$600,000 bonus if the deal is completed, while Scott Smith, president ofTribune Publishing Co., will be paid $400,000.

But the largess may not sit well with the company's new majority owners,its rank-and-file employees, who will shoulder much of the risk for the deal,notes Charles Elson, director of the University of Delaware's Weinberg Centerfor Corporate Governance.

"I have a feeling this deal is going to be very controversial, on manyfronts," Elson said. "I don't think this is the end of the story." Tribune'smarket value, based on Monday's transaction, is about $8.2 billion. So ifTribune's management and "key employees" were to get 8 percent of today'scompany, their payout would work out to $656 million.

But equity in the new, private Tribune will be worth much less at firstbecause debt will account for most of Tribune's capitalization.

If Tribune can retire that debt on schedule, the equity value will risequickly, just like it does for homeowners who pay down their mortgages. Theequity becomes more valuable with each dollar of debt retired. Likewise, ifthe company can't pay its debt, the 8 percent won't be worth much.

"That 8 percent is small now but it has a substantial upside to it," saidDelves, president of the Delves Group. "They just have to perform to make itwork."

Improved performance also would increase the value of the ESOP shares,which will represent 60 percent of the company -- a stake that would be worthabout $5 billion if held in today's company. The theory is that if everybodypulls together to pay down the debt, everybody wins. But managers selected toparticipate in the incentive arrangement have an advantage: Their payout willcome by cashing in phantom stock paid out by the company and its employeeowners.

Phantom stock isn't actual equity, but it is a promise to pay an executivethe value of a share of stock sometime in the future, Delves said.

Under the incentive plan, seemingly as complex as the deal it accompanies,"certain members of management and other key employees" will receive two typesof phantom stock. One series, with a value equal to 5 percent of theoutstanding common stock, will vest over a three-year period. Half of theother series of phantom stock, equivalent to 3 percent of the outstandingcompany stock, will vest immediately when it is granted to plan participants.The other 50 percent will vest a year after the grant date.

The filings don't say how many Tribune managers will be eligible toparticipate in the plan. A company spokeswoman declined to comment, saying thedocuments speak for themselves.

Elson, the corporate governance expert, notes that United Airlines, anotherChicago icon, generated much ill will when it awarded its management team 8percent in the company after the airline emerged from bankruptcy last year.----------jjohnsson@tribune.com mdoneal@tribune.com